On May 10 most of the people of Burma will go to the polls in a referendum on a new constitution. This constitution aims to cement in place a regime (now styled the ‘State Peace and Development Council,’ or SPDC) that has impoverished this once prosperous land.

The SPDC will likely win the referendum. Of course, the regime was surprised at the polls once before when, in 1990, its hubris saw it suffer a crushing defeat at the hands of Burma’s National League for Democracy (and its leader, the later Nobel Peace Prize laureate, Aung San Suu Kyi), but the SPDC is unlikely to make the same mistake again.

A pity for Burma’s economy. Once the world’s largest rice exporter and the richest country in Southeast Asia, Burma today can barely feed itself, and the lucrative rice trade it once commanded has been lost to Thailand, Vietnam, and other countries that were once its peers.

Responsibility for Burma’s economic disaster lies squarely with the military regimes that have ruled over the country since 1962, and who thereafter claimed the principal portion of Burma’s output, while simultaneously (and deliberately) undermining and dismantling basic market institutions.

Today there are no effective property rights in Burma, and the pretences to the rule of law are a mockery. Meanwhile, macroeconomic policy-making is capricious, unpredictable and ill-informed.

The SPDC spends greatly in excess of its revenue and, like many such regimes through the ages (and Zimbabwe in the present), resorts to the printing presses to finance its spending. Accelerating inflation and monetary chaos have been the inevitable consequences, just one manifestation of which is the decade-long plummet in the (blackmarket) exchange rate of Burma’s currency, the kyat.

Most of Burma’s prominent corporations are owned by the military, and the country is judged by Transparency International as the second most corrupt in the world. Burma spends a mere 1.4 per cent of GDP on health and education, less than half that spent by the next poorest country in Asia, and it is the only country in the region whose defence budget is greater than that of health and education combined. In 2008 Burma’s per-capita GDP will amount to only around US $290 per annum. Over 70 percent of this income will be spent on food, by far the highest proportion so devoted in the region.

Over the last five years or so, however, a potential ‘light’ at the end of Burma’s tunnel of economic despair has appeared courtesy of the country’s emergence as a major regional supplier of natural gas. At present most of this gas is sold to Thailand, but new fields will shortly provide for vast sales to China.

Rising gas prices as well as increasing output volumes have caused Burma’s gas exports to soar, driving a projected balance of payments surplus for 2007/08 of around $2.4 billion. International reserves, hitherto barely sufficient to cover more than a month or so of imports, will rise to a (relatively) healthy $3.5 billion.

Burma’s gas earnings should be transforming the country’s prospects—and allowing the fiscal space for the spending on basic infrastructure, health and education the country so desperately needs.

Alas, however, this is not happening, and the foreign exchange revenues Burma is accumulating are currently making next to no impact on the country’s fiscal accounts.

The reason is simple. Burma’s gas earnings are being allocated in the government’s published accounts at the ‘official’ exchange rate of the kyat. This official rate (at around 6 kyat:$1) over-values the currency by around 150–200 times its market value (which is currently about 1,000 kyat:$S1). Such exchange rate duality imposes other costs on Burma’s economy, but critical here is that the use of the official exchange rate to convert the gas earnings into kyat dramatically underplays their true (potential) contribution to state finances.

Recorded at the official rate, Burma’s gas earnings for 2006/07 of $1.25 billion translate into 7.5 billion kyat, or a mere 0.6 per cent of budget receipts. By contrast, if the same US dollar earnings are recorded at the market exchange rate, their contribution of 1,500 billion kyat would more than double total state receipts, and more or less eliminate Burma’s fiscal deficit.

What could be the motivation for this deliberate withholding of financial wherewithal to the state? No-one but the Chairman of the SPDC, Gen Than Shwe, can know for sure.

The most likely explanation is that, so recorded, Burma’s foreign exchange earnings can be kept ‘quarantined’ from the public accounts, and thereby are available for the portioning out by the regime to itself and its cronies.

Where the funds are located is also a mystery.  The only thing we can be certain of is that they are safely locked away from the people of Burma, to whom they rightly belong, and to whom they might just make a difference. In another country this scam would be telling on May 10. That it will not be so tells us much about Burma’s tragic present.

Sean Turnell is with Burma Economic Watch, Macquarie University, Sydney, Australia